Responding to Vladimir Popov, Tony Wood examines the geographical and social distribution of Russia’s recent economic growth. What are the priorities and outlook of the emerging business-state elite—and whom will Putin’s ‘stabilization’ benefit?

TONY WOOD

CONTOURS OF THE PUTIN ERA

A response to Vladimir Popov

In ‘Russia Redux?’, Vladimir Popov has provided a lucid reckoning of the terrible economic, political and human costs of the shock-therapy era. If Russia is in slightly better shape now than seven years ago, it is still significantly worse off than it was twenty years ago. As one striking graph after another demonstrates, gdp, investment and life expectancy have yet to return to their 1989 levels. What Popov terms ‘the recession’ has few comparisons in world economic history. Nevertheless, it is heartening that he can present data which point to significant improvements in several areas. After the ceaseless turbulence and moral bankruptcy of the Yeltsin years, the two administrations of Vladimir Putin have been widely characterized as inaugurating a new era of stability in Russia: state power has been reasserted and, thanks to high oil prices, gdp has grown markedly, government finances are in the black, and much of the country’s external debt has been paid down. There has also been good news in the social sphere: the birth rate has risen, while the suicide and mortality rates have declined.

However, as Popov warns, there are many dangers ahead. The rouble is overvalued, and the economy is overly dependent on the current commodities bonanza. Moreover, the government has not used the windfall from natural resources to fund spending on public goods, and has even opted to further shrink the tax base. Nonetheless, Popov concludes that ‘Russia is in better shape today than seven years ago’, and asserts that the priority is to ‘restore the institutional capacity of the state’. The erosion of democratic prerogatives that has accompanied Putin’s re-centralization drive is the price that must be paid for continuing stability; the alternative is chaos.

Popov’s empirical approach is a much-needed corrective to the liberal-capitalist mirages of ‘transitology’, and to the Kremlin shadow-puppetry of the mainstream Russian media. Above all, it provides a solid basis on which to advance discussion. What follows is an attempt to probe further into the trends Popov has outlined. This is in part a matter of more detailed quantification—differentiating the elements of the overall picture, in order to see more clearly the imbalances between them. But a closer examination of Russia today also has far-reaching qualitative implications, which in turn will determine how—or indeed if—the hazards Popov has identified are addressed.

Geography is a crucial variable in assessing Russia’s present condition. Both population and resources have always been distributed extremely unevenly across the country’s vast territory. Industry is concentrated in European Russia, the Urals and the Arctic Circle; as a result, the per capita gross regional product of the Central Federal District, for instance, is two and a half times higher than that of the Southern steppe and North Caucasus. The capital’s gravitational pull on the country’s economy is extraordinary: Moscow alone accounts for 20 per cent of gdp. If we factor in the wider Moscow region, St Petersburg and Tiumen’, only ‘four regions produce nearly half of Russia’s output’.
[3]
eiu, p. 45. It should be noted, however, that many Russian companies have their headquarters in Moscow, which inflates the city’s figure substantially; nevertheless, this statistical bulge itself illustrates the capital’s dominant role in the national economy. The present reliance on exports of oil, gas and metals has exacerbated existing imbalances by dramatically raising the wealth of resource-rich regions: annual per capita gross regional product in Tiumen’ oblast’, for instance, stood at 575,411 roubles in 2004 ($19,800), compared to 12,583 roubles ($430) in Ingushetia, the Russian Federation’s poorest sub-unit.
[4]
Figures from RosStat website. Needless to say, this torrent of cash has largely flowed into the coffers of extractor companies as profits, rather than to employees as wages.

Regional aggregate figures conceal further disparities. There are significant differences not only between regions, but within them. In the Central Federal Region, for instance, annual grp per capita stood at $4,350 in 2004, and the average yearly income at the end of 2006 was $6,120. But the gap between the region’s maxima and minima is vast: where the average annual income in Moscow is $13,440, in Ivanovo oblast’ it is a mere $1,860—a ratio of over 7 : 1. Lower, but nonetheless significant, ratios obtained elsewhere: in the Urals, the average income of the Yamalo-Nenets Autonomous okrug is nearly five times higher than that of Kurgan oblast’; inhabitants of Samara oblast’ on the Volga earn two-and-a-half times as much, on average, as those of Mordovia.
[5]
Figures from RosStat website. Given the aforementioned concentration of industry, and corresponding focus of investment and employment opportunities, the distance between well-fed regions and lean zones seems set to widen in the years ahead. In such a context, the gradual increase in domestic fuel prices that Popov recommends in his conclusion would have vastly disparate impacts in different parts of the country and on diverse social sectors—reinforcing the dynamic of growing territorial and social inequality.

Stabilization and deceleration

High global oil prices, coupled with the dominant role of natural resource extraction in the Russian economy, have resulted in a Slavic version of the ‘Dutch disease’. Popov points to the consequent overvaluation of the real exchange rate as the principal reason for the effective slowdown in the rate of gdp growth since 2000. But a sequence of other, interconnected factors could be adduced, with significant longer-term implications.

Firstly, there is the matter of investment, both in terms of scale—relatively low, at less than 20 per cent of gdp—and character. The smashing of the planned economy in the 1990s led to large-scale de-industrialization in Russia, and what profits did accrue from surviving enterprises were largely funnelled out of the country into offshore accounts. The rouble collapse of 1998, in rendering exports more competitive, encouraged capitalists to repatriate some of this wealth. But as Simon Clarke notes, though investment has increased since the 1990s,

The direction of investment towards existing capacity, rather than towards diversifying the economy, may partly explain why the volume of imports increased by nearly 20 per cent in 2003–05: even in auspicious macroeconomic circumstances, domestic goods have been unable to compete with foreign-produced ones in many sectors.
[7]
eiu, p. 43. This seeming unwillingness to devote funds to broadening the base of the Russian economy—and so the basis for future profits—suggests that the Russian business elite remains largely extractive in nature. Unless and until this orientation changes, gdp growth will continue to depend above all on the vagaries of global oil prices.

In a country where ‘as many as one hospital in five still lacks hot water and sewerage facilities’, where ‘state funding pays for less than one-third of the operating costs of state universities’, a government awash with cash has nonetheless opted not to spend much of it on public goods.
[11]
eiu, p. 24. Instead, it has poured its resources into global capital markets, to ‘finance oil importers’ bigger current-account deficits—in effect, lending the increase in fuel bills back to consumers’, and propping up their economies rather than redressing the imbalances of its own.
[12]
Economist, 10 November 2005. This, it should be stressed, is in addition to running a budget surplus of 7.7 per cent of gdp in 2005, and implementing a series of regressive changes to the tax regime since 2001—including a flat income-tax rate of 13 per cent and a cut in corporate tax from 35 to 24 per cent—that have systematically favoured corporate wealth at the expense of ordinary citizens.
[13]
eiu, pp. 66, 39.

Who rules Russia?

The Putin government’s choice of spending priorities—bolstering the euro and the tumbling dollar rather than providing for the needs of its own people—and the reluctance of Russia’s entrepreneurs to invest in expanding domestic markets, raise fundamental questions as to the overall strategy of Russia’s current business and political elite. Before addressing these, however, we need first to tackle a more basic matter: who are Russia’s new rulers?

The melding of security services and political power is a salient characteristic of Putin’s Russia; a point to which I will return. Perhaps even more striking, however, has been the swelling presence of business in the state. The rouble collapse of 1998 profoundly altered the character and composition of the Russian business elite, virtually sweeping away Moscow-based banking and finance, while the sudden boost to domestic production resulting from default and devaluation led to a rise in the weight of the real sector—and a corresponding new prominence of industrial regions. Where the 1990s scene was dominated by a handful of ‘oligarchs’, at the turn of the century political influence and economic throw-weight was distributed across a larger, more geographically dispersed pool of individuals, with closer affiliations to the state apparatus than their tycoon predecessors. Indeed, an examination of the trajectories of the new business elite reveals that in 2001, 29 per cent had a nomenklatura background, up from 24 per cent in 1993; Kryshtanovskaya and White further observe that ‘the main source of recruitment of the business elite is government ministries’.
[15]
Kryshtanovskaya and White, ‘The rise of the Russian business elite’, Communist and Post-Communist Studies, 38 (2005), p. 300.

Conversely, business has been a significant source of state cadres. This applies at all levels: a whole section of Putin’s Presidential Administration was drawn from the ranks of Al’fa Bank, while as Table 1 shows, by 2003 some 20 per cent of the government was drawn from business, which provided almost the same proportion of Duma deputies. The representation of business in the upper house of the Russian Federal Assembly was still higher: in 2002, almost a third of Federation Council members came from private enterprises.
[16]
Andrew Barnes, ‘Russia’s New Business Groups and State Power’, Post-Soviet Affairs, vol. 19, no. 2 (2003), p. 180. More than a dozen Russian regions, resource-rich ones prominent among them, are now headed by businessmen from major local companies.

The Financial Times has described Putin’s immediate entourage as the ‘quasi-board of what might be called Russia, Inc.’ The broad extent to which state and business have merged, and the amphibious character of functionaries and executives, initially suggest that this would be an apt term for the country as a whole. The question arises, however, as to which of the Russian elite’s two faces—business and state—predominates; which fractions set longer-term goals and priorities?

Elite orientations

The reassertion of state control over strategic companies and sectors has been seen as a sign of stealth nationalization—the state using its administrative powers to crush Khodorkovsky’s yukos and, more recently, even muscle aside multinational companies such as Shell. Western establishment analysts have diagnosed these developments as a case of ‘resource nationalism’, likening Putin’s actions to those of Chávez or Morales, while the latest leitmotif of Russian political discourse has been the idea of ‘sovereign democracy’—essentially referring to Russia’s ability and determination to pursue an independent course, no longer reliant on loans or approbation from the West.

Neither of these concepts is an adequate measure of the orientation and outlook of Russia’s contemporary elite. As noted above, the Putin administration has not actively redistributed oil wealth to those dispossessed by the ‘reforms’ of the 1990s; indeed, its tax regime seeks precisely to benefit the wealthy still further, while the monetization of benefits and increased charges for utilities penalize the poor. Though the poverty rate is declining and wages rising, any significant drop in oil prices will likely reverse these trends, which will once again have the most severe impact on the lowest income strata. The decision to spend the oil windfall on euros and dollars, meanwhile, is ostensibly motivated by a desire to keep inflation in check; but in a context of continued infrastructural dysfunction, such prudence is a form of deferred suicide, starving the nation of the public goods that would secure its survival in the longer term.

Popov criticizes the decision not to spend oil revenues on public goods and infrastructure, but does not pose the question of why it was made. It is clear, however, that for all the nationalist rhetoric emanating from the Kremlin, it is not the livelihoods and prospects of its own citizens with which Russia’s rulers are concerned. Rather, it is the continued flow of oil out and money in which they seek to secure, distributing largesse to the silent narod when electoral needs dictate, but otherwise focused on the twin prizes of profits and power.

The relationship between these is perhaps the structuring feature of Russia today: administrative power provides crucial tools for business success, while commercial considerations often dictate the allocation of state assets and offices. The convergence of state and business is in that sense far more than a coalition of the self-interested: it is a symbiosis rooted in the neo-patrimonial form assumed by capitalism in Russia. For the state has been the key structure through which the country’s capitalists have pursued their economic interests—using its officials to secure the outcome of privatizations; to facilitate hostile (often armed) takeovers, asset-stripping and money laundering; to defer or conceal tax debts; even to act as paid protection against organized crime. At a meeting with the country’s most prominent tycoons in July 2000, Putin revealingly pointed to ‘the fact that you have yourselves to a significant extent formed this state, through political and quasi-political structures under your control’—adding that ‘perhaps what one should do least of all is blame the mirror.’
[19]
Tompson, ‘Putin and the “Oligarchs”’, p. 182.

The resulting formation could be described as one in which the state has little or no autonomy from the economic interests of Russia’s elite. The fractions of this state–business alloy consist of both state actors and business groups, who combine according to common economic interests. Divisions on forward policy—such as the further liberalization and lowering of tariff barriers required for wto entry—take place along sectoral lines, with many export-oriented manufacturers and still-fragile banks aligned with proponents of ‘sovereignty’, against liberal supporters of increased integration into the global economy. The influence of the two main tendencies fluctuates, with Putin hovering above the fray—and deliberately working to maintain the fragmentation of domains and interests that has thus far blocked the emergence of a unified capitalist class.

Putin enjoys considerable support among the general populace, but this has a shallow, plebiscitary character, and should not be mistaken for a broad social consensus on which the elite as a whole could depend. Indeed, Russia’s rulers have been unable to forge an ideology with any consistent appeal; the recent cultivation of nationalist sentiments has mostly taken the form of post-imperial spasms, rather than a coherent vision that would enable them to exert moral leadership. They instead hold sway over the atomized populace through a combination of electoral approval for Putin himself and various unformalized mechanisms of coercion. These play a more prominent role than Popov’s analysis—where crime, corruption and the informal sector appear as mere by-products of an unstable conjuncture—would suggest. Indeed, they are integral to the functioning of Putin’s Russia, and as such are critical to any understanding of its future course.

Symptoms of informality

The principal administrative change wrought by Putin has been a formidable re-centralization; the ‘vertical of power’, in the President’s own phrase, has been firmly planted in the country’s soil. This has meant, on the one hand, increased efficiency in the basic functioning of the state—above all in the collection of taxes—and the assumption, to a higher degree than in the Soviet period, of civilian posts by military and security service personnel. On the other hand, increased centralization has had at least two other, less widely remarked consequences. Firstly, the federal centre has not done away with regional structures, but rather has simply created a new layer of state employees who usurp the functions of their counterparts, without displacing them altogether. Hence, in part, the phenomenal bureaucratization of the Russian state: there are now 1.3 million functionaries, more than twice as many as the ussr had prior to its dissolution.
[23]
eiu, p. 9. Secondly, it is not only authority that has been centralized: the shadow world of corruption has been similarly reorganized. According to research by the Russian think-tank indem, although the quantity of bribes decreased by 20 per cent over 2001–05, the average size of a bribe actually increased thirteen-fold.
[24]
Cited in Leonid Kosals, ‘Klanovyi kapitalizm v Rossii’, Neprikosnovennyi zapas, 50 (2006), p. 196. The same study estimated the volume of business corruption at $316bn, while the Russian deputy general procurator put it at $214bn. Either way, as Leonid Kosals observes, ‘both figures exceed the scale of revenues of the Russian federal budget’—adding that the growth of corruption ‘is roughly tenfold, which is many times greater than the growth of the economy as a whole.’
[25]
Kosals, ‘Klanovyi kapitalizm’, p. 191.

The scale of corruption in Russia stems above all from the continued prevalence of informal practices in all spheres of society—in turn a product of what Georgi Derluguian has called the ‘persistent under-institutionalization of Russian life’.
[26]
Georgi Derluguian, ‘Under Fond Western Eyes’, nlr 24, November–December 2003, p. 138. In political terms, the lack of institutions gives rise to widespread personalism, which at the very least sustains a ferment of cliques and factions—witness the number of St Petersburgers in Putin’s retinue. It also frequently clears the way for brazen nepotism. To cite only two of countless examples: between 1996 and 2000 the Kursk oblast’s oil concern, pharmacies, public security and cultural affairs were placed into the hands of his relatives by the then-governor Aleksandr Rutskoi; while much of Bashkortostan’s economic life today lies in the purview of president Murtaza Rakhimov’s family.

There are, of course, plenty of similarly egregious cases elsewhere in the world. But the personalism that facilitates such corruption is part of a whole complex of informal practices on which the post-Soviet order relies. As Alena Ledeneva has argued, ‘the informal component is an integral part of political power in Russia, which makes it both efficient and dependent on the unwritten rules, their non-transparency, and the selectivity of law-enforcement.’
[27]
Alena Ledeneva, How Russia Really Works: The Informal Practices that Shaped Post-Soviet Politics and Business, Ithaca, ny 2006, p. 188. Hence, for instance, the dismemberment of yukos did not aim solely to transfer prize assets to companies connected to the government; it also deliberately sought to create uncertainty among investors as to the rules of the game—preserving the prerogative of state officials to uphold or overturn property rights, according to the interests of their own fractions.

The Russian economy has long possessed a sizeable shadow sector. In the Soviet period, it was above all a mechanism for coping with shortages; similarly, in the 1990s, when cash was in short supply and, as Popov records, ‘the payment system was on the brink of collapse’, barter deals made up 50 per cent of total transactions and the shadow economy accounted for between 40 and 50 per cent of gdp.
[28]
Popov, ‘Russia Redux?’, p. 44; Kosals, ‘Klanovyi kapitalizm’, p. 184. The commodities boom has ensured a substantial monetization of the economy, but Popov warns that barter and non-payment could surface once more, ‘if the authorities resort to tight monetary policy’. This somewhat understates the extent to which informal economic mechanisms are a permanent feature of Russia’s socio-economic landscape. Again, the favourable macroeconomic climate conceals the persistence of unofficial channels; where the latter ‘were used in the Soviet economy to protect enterprises from the exigencies of the plan’, present-day recourse to them ‘protects companies from the exigencies of the market.’
[29]
Ledeneva, How Russia Really Works, p. 118.

Crime and colonial war

According to Popov, ‘the scale and scope of criminality in Russian society remains vast’. The murder rate currently stands at over 20 per 1,000—three times as high as that of the us, and ten times that of Western and Eastern Europe, Canada, China and Japan. Still, this is lower than before. There has, however, been a 60 per cent increase in the overall crime rate over 2002–06. Popov contends that this is ‘most likely a sign of better recording of crimes’.
[30]
Popov, ‘Russia Redux?’, pp. 46, 49. Many would not share his confidence. A higher degree of (real or perceived) official competence no doubt encourages people to report crimes; but enough to account for a 50 per cent rise, over an already high rate? The persistence of informal practices mentioned above, the continued and growing corruption, and the further entrenchment of income inequalities, all work to expand the social fractures in which crime thrives. The fact that the law is manifestly an instrument at the service of particular interests and factions has arguably done much to undermine respect for legality.

But it is Putin’s continued use of force that has contributed most to the legitimization of violence in the country as a whole. The war in Chechnya, waged with even greater ferocity than that of 1994–96, propelled him to the presidency in 2000, and has played a vital role in his consolidation of an authoritarian system: crushing Chechen aspirations to independence was the militarized component of Putin’s re-centralization drive, and his uncompromising stance underpinned much of his initial public appeal. Popov glides past the atrocities and ongoing occupation, noting only that ‘today the separatists are largely defeated’. Russian military and government spokesmen have declared victory several times—starting with Putin himself as early as 2000—but with the war now in its eighth year, no end is in sight. The Russian army continues to suffer casualties at an average rate of around 3 per week, picked off by a small but highly mobile resistance; the puppet regime Moscow has set in place consistently kidnaps, tortures and kills its countrymen, and is bereft of all legitimacy. There is no viewpoint from which Putin’s war on Chechnya could be considered a success. Popov himself provides indirect confirmation of its failure when he refers to the 43 per cent of the population who in early 2004 wished the president to end it; by late 2006, the proportion of those in favour of negotiations with the separatists stood at 64 per cent.
[31]
Popov, ‘Russia Redux?’, p. 50; poll data from Levada Centre, www.levada.ru.

The war is a catastrophe whose consequences stretch far beyond the North Caucasus. In Russian society as a whole, Putin’s counter-insurgency in Chechnya has fostered an upsurge in xenophobia and unapologetic imperialism, the killing of tens of thousands of Chechens portrayed as essential to the survival of Russia as a state. It has had a more directly damaging impact on over a million Russians, ranging from raw conscripts to mercenaries to law enforcement officers, who have passed through Chechnya since 1994: all of them have either committed or witnessed acts of boundless brutality, and for all of them, unlimited force is an officially sanctioned mode of conduct. The psychological trauma inflicted on soldiers by the war has been termed ‘Chechen syndrome’. But the insidious symptoms of aggression are not confined to veterans’ minds; they have become rooted in Russian public and political life.

The lesser evil?

Popov concludes by emphasizing the need to choose the lesser evil of centralization and potential authoritarianism over the inevitable unravelling and chaos that will accompany any other course. Stability is the prime consideration; democracy can wait until more favourable circumstances develop. The question that immediately arises is: stability for whom? From the foregoing analysis, it should be clear that Russia’s rulers have little interest in the fortunes of the general populace; the current priority is rather to use the country’s natural resources to leverage a greater role in global affairs, and so carve out further opportunities for the internationalization of Russian capital. Entry into the wto will assist in the latter goal, though it will also bring with it a dismantling of the protections that have served Russian industry well, and undermine recent attempts to revive manufacturing in the automobile and aviation sectors. To the dangers Popov lists, then, we should add the exposure to international capitalist pressures and widening of existing inequalities that inevitably accompany wto accession. These forms of destabilization will, of course, largely bypass the fractions of business and state most actively seeking them.

Finally, there is the matter of the lesser evil. Popov poses the alternatives in stark terms: the status quo or utter disaster. Such logic has long helped to rally critics of various kinds to otherwise unpalatable governments. But it is precisely the immunity from challenge or debate that enables crime, coercion and corruption to flourish; conversely, it is the availability of alternative proposals for future paths of development that constitutes the political health of a nation. Popov’s analysis presents many points from which such a discussion could begin.

[3]eiu, p. 45. It should be noted, however, that many Russian companies have their headquarters in Moscow, which inflates the city’s figure substantially; nevertheless, this statistical bulge itself illustrates the capital’s dominant role in the national economy.

[21] Vadim Volkov has concluded that in the period since 2000, ‘the major instruments of aggressive enterprise takeovers are corrupt state organizations that have judicial and coercive power.’ Volkov, ‘The Selective Use of State Capacity in Russia’s Economy: Property Disputes and Enterprise Takeovers After 2000’, ponarsPolicy Memo no. 273, October 2002.